Analysis: Medicaid dispute casts doubt over New York's budget

NEW YORK (Reuters) - An investigation into substantial overbilling of the federal government by New York state's Medicaid program could mean the state will have to repay billions of dollars in state aid just as it has begun to get its house in order.

The audit, launched earlier this year by Centers for Medicaid and Medicare Services, the federal agency that oversees Medicaid, has become a source of financial uncertainty as state lawmakers get ready to approve later this week a $140 billion budget for the year ahead. The agency will conclude its audit later this year, opening the door to hefty claims against the state during the new fiscal year, which starts in April.

Claims of overbilling in New York state are not new, but CMS's audit along with bipartisan calls in Congress for a much further reaching probe into New York's $54 billion Medicaid system is a sign federal authorities could be about to get much tougher. About half of New York's Medicaid bills are paid by the federal government.

For the moment, CMS's probe focuses on a relatively small part of New York's Medicaid system that provides care to people with developmental disabilities through residential development centers. According to a bipartisan report by the House of Representatives Committee on Oversight and Government Reform, the state claimed $15 billion more than it should have done over the past 20 years.

Estimating the amount New York state may have to reimburse the federal government is still speculative while the audit continues. But a report by Standard & Poor's Rating Services said reimbursements for just a five- year period could cost the state up to $7 billion.

"It's all uncertain at this point but the amounts that people are talking about are very large, so of course that would have an impact," said David Hitchcock, a specialist in New York state finances with Standard & Poor's.

Medicaid is a system of medical insurance for people on low incomes that is shared between federal and local authorities. Reimbursement rates vary from state to state and local authorities design the plans themselves, making oversight a complex multi-agency task.

The Office of Inspector General at the Department of Health and Human Services regularly pulls up states when it thinks they are asking inappropriate rebates. The claims of overbilling in New York are unusual because they are so large and go back two decades.

New York state budget officials declined to comment on the $7 billion figure but acknowledged in an updated financial plan released by the Division of the Budget in February that the federal government may "seek to recover federal funds on any payments found in excess of federal payment requirements."

CUOMO CUTS $1.1 BLN FROM BUDGET

The report also acknowledged that claims by the state might not stop there, noting that the "claims could jeopardize a significant amount of federal financial participation in the State Medicaid program."

In recognition of this, New York Governor Andrew Cuomo cut $1.1 billion in February from his budget plan, which is expected to be passed by state lawmakers on Friday, as CMS prepares to cut its funding for the centers at the start of April, according to the Division of the Budget.

Cuomo, has succeeded in narrowing a budget gap of around $10 billion when he took over in 2011. The budget proposed for fiscal 2014 is projected to close a general fund budget gap of $1.35 billion.

State officials are hoping the $1.1 billion cut will be enough to draw a line under the matter and even question the legitimacy of any retroactive claims, pointing out CMS consistently signed off on the funding for developmental centers on 35 occasions, effectively voiding their right to revisit the issue, they say.

The reaction by state officials, including the budget office, suggest any federal claims may not go unchallenged.

"Everybody seems to agree that the federal government approved these claims," Senator Kemp Hannon, chairman of the New York Senate's health committee, told Reuters. "If they affirmatively approved them do they have any case?"

However, the U.S. House Committee's report explicitly calls for reimbursements and staffers there say the committee will push for more money if it feels the state is getting off too lightly.

Medicaid is a politically sensitive issue as states gear up for an expansion of the coverage under the Obama administration's Patient Protection and Affordable Care law.

To be sure, there is still a chance of a benign outcome for the state if federal authorities decide not to pursue claims retroactively. But in an environment when the federal government is under pressure to close its own budget deficit there is no guarantee that it will not try to claw back the money.

"If they had a very large amount that they were charged, it might not affect this budget," said Hitchcock. "If it did, it would probably be towards the end of the budget year - but it could have some major impact if they had to make a very large contribution back to the federal government."